Category: Personal Finance Basics

Do you get to the end of the month and say, “Where did all my money go!”? Are you living paycheck-to-paycheck. If you are, you’re not alone. Around 70% of Americans live paycheck-to-paycheck. I did for a long time. In fact, I not only didn’t save anything, but I didn’t have an emergency fund. I was one emergency away from disaster financially. And then disaster hit! That’s when my husband and I sank into the darkest days of our marriage. I never want to be there again. And, I don’t want you to be there, either! I’d like to help you get out of that pit or never fall into it.

Is the “B” word a dirty word for you?!

This post is going to show you how to do a budget. I know, the “B” word is a dirty word for some folks. Like the assignment to add up all your debt in the post How Do I Get a Handle on My Money, putting together your budget will take some time and effort. It may bring some heartache and frustration. It’s like starting to exercise. It’s not pleasant at first, but it will be worth it if you stick to it!

How do you start?

The first step to putting together your own Monthly Budget is to look at your monthly inflows and outflows of money or your Monthly Income and Monthly Expenses.

Gather Your Income Data

First, you will need to gather all your monthly income sources. This will be your monthly paycheck (take home) and any other income source you have, such as side jobs, dividends or even alimony.

Gather Your Expense Data

Next let’s look at your expenses. This will take some time, so be patient with yourself! Write down everything you spend throughout the month. There will be lots of categories.

As with the Net Worth Statement, you can track these categories and their corresponding numbers with pencil and paper, or I have created a Monthly Budget Spreadsheet. The spreadsheet has columns for 6 months, and you can expand that as needed. You may want to change the headings from Month 1 to Jan 2020 and so on. The picture of the spreadsheet can be found below, and the link to the actual sheet is below that. Again, the spreadsheet is protected and you will need to make your own copy.

Giving and Savings First

Let’s look at those expense categories. For me and my family, Tithing/Giving is always at the top of the list. We believe in the Biblical principle of “first fruits” giving. This just means we give first and budget what’s left. For us, right behind giving is saving. Have you heard the term “Pay Yourself First”? This is a basic concept in saving for the future. (unfortunately, one I did not do for a long time!) Again, it is the idea of do your saving first and live on the rest. Or Pay Yourself First and then pay everyone else!

You may not be Tithing/Giving and Saving yet. Don’t worry. Both of these concepts are VERY important, but they can be addressed when you have a clear picture of where you’re money is going every month. Saving and Giving are like a muscle…they can be developed with exercise.

Other Expense Categories

Next, let’s look at the other categories. Start with the big ones like mortgage/rent payments, food and car expenses. You will also need categories like insurance payments, cell phone, utilities, cable and internet. Anything that you pay monthly needs to go on this list. And don’t forget those pesky subscriptions. Netflix, Pandora or anything that is automatically paid on your credit card.

The next step is to add categories for things that happen seldom or once a year like birthday and Christmas presents. How about printer cartridges and school pictures. There’s also car repairs, vacation and property taxes. These are not spent monthly, but they need to be considered. Take some time to think about how much money you normally spend in these types of categories in a year’s time, divide it by 12 and add that amount to your list of expenses.

Let’s Do the Math

At this point, if you’re doing this on paper, add up all your Monthly Expenses and then subtract that from the Total Monthly Income. If you’re using the spreadsheet it will do the math for you.

Look at the number at the bottom or Total Monthly Income minus Total Monthly Expenses. Is that number positive or negative? Are the Expenses greater than the Income or are they less? If they are less, great! The difference between Income and Expenses can be called the Gap, and we will talk in a future post about how to grow that gap. This is what will allow you to save for the future.

Are your Expenses greater than the Income (or the number at the bottom is negative)? This is what some would call a “Dumpster Fire”! This requires some immediate action. Look at your expenses and see what you can trim TODAY! See where you can cut in order to get the bottom number to zero.

Having Zero at the Bottom

Speaking of the bottom number being zero, my instructions on the Monthly Budget Spreadsheet say the bottom line number should equal zero. The reason for this is if you have trimmed your spending down to be less than your Income, there is excess or what I called earlier, the Gap. This Gap is where you can start saving! If you have a Gap now, great! This amount can go in the Saving Category at the top of the list of Monthly Expenses. This should bring your bottom line to zero. This method of budgeting is called a “Zero-Based Budget”

Give Yourself A Break!

This is NOT an easy task if you’ve never done a budget. In fact, it takes most people about 3 months to get the hang of it. You’ll forget categories, you’ll over or under estimate what you spend. One month will have a minor disaster that has to be handled. It’s OK. Give yourself a break. Just DON’T GIVE UP!

What Does Your Spending Say?

Now that you have done your first Budget, what do you see in it about yourself. Remember the “10 Things That Make Me Happy” list? How does your spending align with what makes you happy? Or stated another way…How does your spending align with your priorities and what you value? There may need to be some changes made to your spending to align it with your values.

Wrapping It Up

If you’ve never done a budget or it’s been a while, spend some time this week gathering your data. Use that data to create a current budget for yourself and your family and then see what it’s telling you. Let it guide you to evaluate what areas of your life might need some tweaks. Don’t be overwhelmed by thinking LOTS of major changed have to happen all at once. There’s a phrase coined by Brad and Jonathan at ChooseFI. It’s called the “aggregation of marginal gains”. That means if you continue to stack small changes, eventually you’ve made Big changes. Think about what small changes can be made over the next 7-10 days.

What Does God Say?

But he who listens to me (wisdom) shall live securely, and shall be at ease from the dread of evil

Proverbs 1:33

Looking Ahead

In the next post, I’ll talk about why do a budget and some tips on how to use it.

Monthly Budget Spreadsheet

Link To Monthly Budget Spreadsheet

Assigmnent and Key Takeaway

Assignment – Download the Monthly Budget Spreadsheet (or get a pencil and paper). Gather all your income and expense numbers and fill in all the categories with YOUR numbers. Add or delete categories as needed.

Assignment 1 – Evaluate the bottom line. Is it positive? Great! Is it negative? See what you can change today to bring that back to zero.

Assignment 2 – What can you improve over the next 7-10 days to help your GAP.

Key Takeaway – Evaluate your budget in light of your “10 Things That Make Me Happy” list. Your spending should reflect your values and priorities. If it doesn’t, what needs to change to bring those into alignment?

Your “10 Things” List

Were there any surprises on your “10 Things” list? Did you have a hard time making the list to begin with? You may not think you deserve to be happy or that happiness is just not within your reach. I want to tell you that these ideas are false. You can be happy.

I’m using the term happy, but really, this is joy…joy in the Lord. I’ll write about that in a future post. God gives us all we have and His desire is for you to experience joy.

May the God of hope fill you with all joy and peace in believing, so that by the power of the Holy Spirit you may abound in hope.

Romans 15:13

And, the idea that happiness is not within your reach is also false. In the next few months, we will work through all the steps you’ll need to get your finances on track and be able to tackle that “10 Things” list!

So, how about surprises on your list. You might have discovered some interesting things about yourself or your spouse. One concept that may have appeared is, not everything on your list requires money or at least not large amounts of money. You may have discovered you can be content and intentional with life and relationships and sometimes, that doesn’t cost anything!

Your Net Worth

Now, let’s put that debt number to work. We’re going to create a Net Worth Statement. This is a simple statement that lists all your Assets and Liabilities. Assets are what you Own and Liabilities are what you Owe. The difference between the Total Assets and Total Liabilities is Net Worth.

Why do a Net Worth Statement

A Net Worth Statement gives you a snapshot of your financial position. This information is useful in creating a financial plan or understanding more about your financial health. I know many people who don’t know how much they owe on their mortgage, how much they have in savings or even where some of their assets are. Don’t be one of those! Be informed about your finances.

How to Create a Net Worth Statement

A Net Worth Statement is easy to create. This can be done with a blank sheet of paper and a pencil or with a spreadsheet. If you are doing this on paper, simply draw a line down the middle of the page, title one column Assets and the other column Liabilities. List everything you own in the Asset column and everything you owe on the Liability column.

You’ll need to gather information about what you own, such as the value of your house and cars, similar to how you gathered all your debts earlier. I had you start with the debts or what you owe first because those are usually more time consuming and it’s a more emotional exercise.

If you are a spreadsheet person, you can create your statement with a spreadsheet similar to the one below. I have created a sample spreadsheet that will give you an idea of the categories you might need. Even if you are creating this on paper, look at the categories for ideas of the kinds of numbers you’ll need to gather.

There are many Net Worth spreadsheets available online. You can use this one or find another that fits your style better. Remember, one size does not fit all!

Plug in all your numbers or list them on your paper. When you are finished, add up the Asset column and then add up the Liability column. Take the Total Liabilities and subtract them from the Total Assets. (or let the spreadsheet do the math for you).

Is your Net Worth number positive or negative. If positive, this is your Total Net Worth today. If the number is negative, we’ve got some work to do!

This is my Sample Net Worth Statement Spreadsheet. If you would like to use mine, click the link below the picture of the spreadsheet, save a new copy for yourself and you are ready to go.

Have you wondered, “Will my spouse and I ever agree about money?! Can we possibly work together to create the life we want or will we always be at odds?” The bad news is…money issues are the primary reason for divorce in America. Good news…there’s hope.

I can’t stress enough how important it is to be on the same page with your spouse financially. When you’re not, it’s like being in the same boat, but rowing in opposite directions. You’re together, but you spend a lot of energy and go nowhere.

One of the reasons Stephen and I spent so many years drifting in our finances is because We Didn’t Pay Attention. I kept thinking it would somehow magically all work out. What actually happened was, the more difficult our situation got, the more not being united was a problem. We needed to make some hard decisions and we couldn’t agree.

Getting on the same page with your spouse is possible. Not easy, but possible. Stephen and I struggled with not agreeing on spending, saving or even how to do Christmas! There were many reasons for our divergent ideas.

Background – Everyone grows up with different money experiences in their childhood.

Personality – Are you a natural spender or a natural saver. There are lots of times when a spender is married to a saver. (That’s not all bad, by the way)

Gender Differences – Men look at money as a measure of achievement or a “scorecoard”. Women look at money as part of their security system. When it is not stable, fear can set in. (I experience this!)

Divergent Goals – Each partner may have a different idea of what’s important to them.

Lack of Goals – You may not have even thought about goals or what you’d like your future to look like.

All of these issues can be overcome.

Money Represents Your Values

Your money and the way you handle it represents your family’s value system. You may not have thought much about that, but now is a great time to start.

For where your treasure is, there will your heart be also.

Matthew 6:21

Dream With Your Spouse

Get a cup of coffee, sit on the deck or take a walk in the park and have a conversation. Just dream. Talk about your dreams and your desires for your future. What do YOU want it to look like? What does YOUR SPOUSE want it to look like? Share your desires for your future with each other. Write them down to reference later. If you made your List of 10 Things That Make Me Happy from the previous post Personal Finance Basics Part 1 – How Do I Get a Handle On My Money?!?, now is a good time to pull that out.

While you’re having this conversation, REALLY LISTEN to your spouse. What do you hear from them that maybe you weren’t aware of? What pain might you be hearing from their childhood? Many of the items I shared above may surface during this conversation. The differences in your upbringing, differences is personality or goals. Have grace and patience with each other. Remember, the end-game is to walk into your future together, hand-in-hand.

I entreat you to walk in a manner worthy of the calling with which you have been called, with all humility and gentleness, with patience, showing forbearance to one another in love, being diligent to preserve the unity of the Spirit in the bond of peace.

Ephesians 4:1-3

Budgeting With Your Spouse

Working on the budget is where the rubber meets the road. If you don’t have a budget yet, you’ll need to start working on one. (If you don’t know where to start with a budget, I’ll be talking about that in a future post) If you have one prepared or you’ve been using a budget for a while, it may be time to revisit and revise.

Usually one partner is a money person or a spreadsheet nerd. Most times the other is not. The one with the talent and penchant for spreadsheets can prepare the preliminary budget, but BOTH partners need to make the final decisions. This will require some give and take. Some negotiation over categories and amounts, but in the end you should be able to determine a budget that reflects your goals and your values.

The flow of money in a household represents the value system under which that household operates.

The Board Meeting

One way Stephen and I softened the harshness of talking money was to schedule “Board Meetings”. Arrange a time and place where you can be away from the kids and other distractions to talk money. We would often have our Board Meetings at our favorite “hole in the wall” Mexican food restaurant. If spending money for this is not in the budget, go to the park or someplace that is meaningful to you.

Being outside of your normal surroundings and away from distractions and things that remind you of stress can sometimes make these conversations easier. Have these Board Meetings as often as you need. Later on, they will become a habit you look forward to.

Side Note: We found this was also a good way to have a “calendar meeting”. Coordinating schedules can also eliminate stress on your emotions and your budget. If you know that 3 nights next week you will be at school functions or games, you can plan ahead for meals and not “run through the drive-through”.

Final Thought

Getting a reluctant spouse on board may be difficult, but it is crucial to your success. Show them why you want to implement changes. Show them how much better your future can be if you don’t just follow the norm.

Are you frustrated about your money? Are you embarrassed that you don’t know how to get a grip on your spending? Are you totally frustrated with not knowing how to invest?

You’re not alone. Most Americans live paycheck-to-paycheck. If you’d like to break that cycle, you’re in the right place. I’ve lived at least some of what you’re going through and there’s hope! If you haven’t read my story, you can read it at Our Story. We’re going to step through this together. Ready to get started?

Financial Independence

I want to start by
giving you a picture of where we’re headed.
A vision of what your life can look like when you have your money under
control. I want to tell you about
Financial Independence or FI. Fi means
different things to different people, but the technical definition is – When
your passive income from sources other than your W2 job can cover your
expenses, you are Financially Independent.

Huh, what does that mean?
What’s passive income? This is
income from a source that does not require you to do work. This means you’re not trading your time for
money like you do at your W2 job. These
sources fall into 3 categories.

Dividends
or Interest from investments like stocks or your 401k or IRA

Income from
a side job like an online store or a side business you own

Rental Real
Estate.

These are things that make you money even while you
sleep. Some folks have become
Financially Independent with investments only or rental real estate only and
some have a combination of all 3. It’s
your choice.

How Much Do I Need?

So how much money do you need to become FI? That’s up to you. The easy way to calculate this is to look at how much money it takes for you to live now. We’re going to talk through how to come up with that number in a future post. When you know how much you spend in a year, then that number is plugged into a formula. This formula is generally called the 4% Rule of Thumb. Don’t worry, it’s easy.

The 4% Rule (of Thumb)

The 4% Rule, for short, says that you can withdraw 4% of your
investments each year and still maintain your principal over time.

Total Investments x 4% = Annual
Income

Another way to calculate it would be:

Desired Annual Income x 25 = Total
Investment needed

For example, if you need $40,000/year to cover your expenses
in retirement, you will need $1,000,000 in investments.

Woah! That’s a big
chunk of change!

It might sound like a huge amount right now, but I can tell
you that with the right tools AND the right mindset, this is totally
possible.

Where Do We Begin?

The best place to begin is by evaluating where you are. Do you know how much debt you have? I mean Total Debt. You may have never added up your total
debt. It may be too scary. You may feel like you’ll be judged by your
spouse, friends or family.

It may not by pleasant, but this is where we need to
start. Pull out everything you owe and
add it up. This will include:

car loans

student loans

mortgage (if you have one)

credit cards

loans on toys like boats, 4-wheelers or jet skis

Hold on to your total debt number and we will use in the exercise in Part 2 – Your Net Worth Statement.

Assignment and Key Takeaway

Assignment 1 – Calculate your Total Debt.

Assignment 2 – Make a list of “10 Things That Make Me Happy”. Take some time to think about this. If you could plan your “perfect day”, what would it include? Who would you spend it with? What would you do? Cook a gourmet meal, go on a hike, take a road trip, eat chocolate? It can be anything. Think about what lights you up.

Key Takeaway – Don’t be afraid to take a good look at your debt. The first step in gaining control of your money is to access where you are right now.

Looking Ahead

In Part 2, we’ll look at How to calculate your Net Worth. Until then, Assignments 1 and 2 are your homework. See you next time!